ModernGraham Valuation: Chesapeake Energy Corp (CHK)

moneyCompany Profile (obtained from Google Finance): Chesapeake Energy Corporation (Chesapeake) is a natural gas and oil exploration and production company. Chesapeake is engaged in the exploration, development and acquisition of properties for the production of natural gas and oil from underground reservoirs. It also provides substantial marketing, midstream, drilling and other oilfield services. Its operations are located onshore and in the continental United States. As of December 31, 2011, the Company owned interests in approximately 45,700 producing natural gas and oil wells that produced approximately 3.5 billion cubic feet of natural gas equivalent per day, net to its interest. The Company operates in three segments: exploration and production; marketing, gathering and compression, and oilfield services. In June 2011, the Company acquired Bronco Drilling Company, Inc. In August 2013, SemGroup Corporation completed acquisition of the gas gathering and processing assets owned by Chesapeake Energy Corporation.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $5.11
MG Opinion Overvalued
Value Based on 3% Growth $1.92
Value Based on 0% Growth $1.13
Market Implied Growth Rate 92.27%
Net Current Asset Value (NCAV) -$33.22
PEmg 193.04
Current Ratio 0.70
PB Ratio 1.05

Balance Sheet – 9/30/2013 

Current Assets $3,994,000,000
Current Liabilities $5,678,000,000
Total Debt $12,736,000,000
Total Assets $42,288,000,000
Intangible Assets $0
Total Liabilities $26,092,000,000
Outstanding Shares 665,230,000

Earnings Per Share

2013 (estimate) $1.28
2012 -$1.46
2011 $2.09
2010 $2.36
2009 -$9.56
2008 $1.14
2007 $2.52
2006 $4.15
2005 $2.51
2004 $1.53
2003 $1.20

Earnings Per Share – ModernGraham 

2013 (estimate) $0.13
2012 -$0.66
2011 -$0.27
2010 -$0.92
2009 -$1.66
2008 $2.32


Chesapeake Energy Corp has shown a good level of growth over the recent period, but it does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s current ratio is far too low for either investor type, the company has not had stable earnings or earnings growth over the ten year period, and the company is currently trading at a high PEmg ratio.  Value investors such as these, seeking to follow Benjamin Graham’s methods, should research other opportunities, including reviewing ModernGraham’s valuation of Schlumberger Ltd.  From a valuation perspective, the company appears overvalued despite its growth in EPSmg (normalized earnings) from $-1.66 in 2009 to an estimated $0.13 for 2013.  The market is currently implying a growth estimate of 92% from the current EPSmg figure of $0.13, which is significantly higher growth than what has been demonstrated historically.

What do you think?  Do you agree that Chesapeake Energy Corp is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Chesapeake Energy Corp (CHK) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill





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